Possible Iraq vote delay weighs on oil

U.S. open to U.N. vote next week; natural gas sinks

NEW YORK (CBS.MW) -- Crude-oil futures fell 5 percent to close just above $36 a barrel Thursday as the Bush administration indicated it's open to pushing back a U.N. vote on war with Iraq until early next week.

"Delay is the pall hanging over everything," Michael Fitzpatrick, an analyst at Fimat USA, said in a note to clients.

The White House said it was willing to delay a vote on a second resolution concerning Iraq's compliance with giving up weapons of mass destruction if such a move would help secure support for passage of the measure in the U.N. Security Council.

But Secretary of State Colin Powell told a House committee that options under consideration include "to go for a vote and not to go for a vote."

Additionally, a CNN report citing U.S. officials said negotiations for the surrender of some Iraqi military units were under way -- raising the notion that even if war does surface, it could be a quick win for the forces allied against Iraq.

On that note, April crude fell back by $1.82 to close at $36.01 a barrel in the New York Mercantile Exchange trading, burying the previous session's gain of $1.11. The contract reached an intraday low at $35.75.

"There are some bearish factors that will be harder to ignore down the road," said Grady Garrett, chief trading strategist at EnergyTrendAlert.com, a commodity information provider.

Besides the possibility of Iraqis surrendering, he cited an inevitable warming up of the weather and historically high gas prices. And if the U.S. economy falls back into recession, it will tone down demand for crude, Garrett said.

Tight fundamentals

But Person pointed out that oil inventories are at 30-year lows and that OPEC may already be running at full operational capacity. "Until there is a solution to relieve the pressure from low inventories, crude oil will remain at this $35-to-$38 range," he said.

Indeed, the Energy Department and the American Petroleum Institute both reported sizable declines Wednesday in the nation's weekly crude and gasoline inventories, along with mixed data on distillate supplies.

The Energy Department reported a 3.8 million-barrel decline in crude inventories as of the week ended March 7. Total stocks of 269.8 million barrels are nearly 18 percent below the year-ago level and stand just under the 270 million barrels that the government has set as the minimum level at which U.S. refineries can operate normally.

Motor gasoline stocks also dropped, retreating to 202 million barrels, down 4.1 million barrels in the latest week, according to the Energy Department. Supplies are now 7 percent below their year-ago level. Read the report.

Distillates, which include heating oil, rose by 1.8 million barrels to stand at 98.3 million barrels. Despite the gain, this was still 23.6 percent below their year-ago level, the Energy Department said. See full story.

The latest supply update comes on the heels of OPEC's decision Tuesday to leave unchanged its members' aggregate production limit, excluding Iraq, at 24.5 million barrels.

Also this week, the International Energy Agency said OPEC only has an estimated 900,000 barrels per day in spare oil capacity, excluding Iraq and Venezuela. Read more.

But some members, particularly OPEC heavyweight Saudi Arabia, have hinted broadly at a possible output hike in the event of war. See full story.

Prices also fell Thursday on the back of Nymex's margin rate increase, according to Infinity's Person.

This is an "old traders tool" in which traders believe a margin rate increase indicates that the exchange sees a potential for a major price decrease, he said, adding that "the reverse is true when they lower margins."

Nymex defines a "margin" as the amount of money deposited by a customer with his broker to insure the broker against adverse price movement on open futures contracts.

Combined with a "sigh of relief feeling that this grip of tension over Iraq may end sooner," energy traders sold off oil and producers sold "as a cost structure measure to lock in higher prices," he said.

Retail gasoline prices fire up

The supply situation is particular important when it comes to domestic gasoline stocks.

Despite the latest fall in the April gasoline contract -- a drop of 5.62 cents to $1.0577 a gallon -- retail prices for the fuel at the pump have been unmistakably on the rise.

"There is no evidence, yet, that higher prices have led to reduced demand, even in Northern California where motorists are paying the highest numbers ever," said Tom Kloza, chief oil analyst at gasoline research provider Oil Price Information Service.

At the retail level, gasoline prices averaged $1.708 a gallon, up from $1.227 a year earlier and a stone's throw away from the all-time high of $1.718 seen in May 2001, according to AAA's Daily Fuel Gauge Report. In California, average price for regular gasoline was $2.127 -- the highest in the nation.

But the Energy Department said Wednesday that it sees no indications of "price gouging" in the oil market.

"Gasoline prices are currently elevated largely due to high crude oil prices, and to a lesser extent, strong refining margins," the agency said. "Distribution and marketing margins are not unusually high, and there is no evidence of price gouging at any level." Read the report.

Heating fuels feel the heat

Also on Nymex, natural-gas futures closed at a more than one-month low after a weekly update revealed a smaller-than-expected contraction in the nation's supplies.

April natural gas fell 50.4 cents, or 8.6 percent, to close at $5.361 per million British thermal units -- its lowest close since Jan. 31.

Early Thursday, the Energy Department said supplies of the heating fuel fell by 117 billion cubic feet during the week ended March 7.

Analysts at Fimat were looking for a decline of 143 billion cubic feet. A year earlier, supplies fell by only 91 billion cubic feet.

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